1. EBITDA and EBITDA Multiples Drive Deal Prices.
Many deals are valued off of financial metrics and completed deal comparables. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, is the key metric for applying a multiple to derive the value of a company. Typically, the EBITDA is based on the trailing twelve months (TTM) when determining the value of the company.
Corporate M&A departments (strategic buyers) and financial buyers value deals based on EBITDA multiples that increase or decrease depending on the company's Type, Industry, Size of the Market, Revenue Growth Rate, Gross Profit Margin, Management Team, Recurring Revenue, EBITDA, EBITDA Growth Rate and other factors. The amount of the multiple (4X, 6X, 10X, etc.) depends on the above factors and other like size of the company, etc.
2. Acquiring Companies Don't Buy Low or No-Growth Companies.
A ten year old company that is growing 10% per year is of no interest to larger strategic buyers. A financial buyer, such as a Private Equity firm, may be interested as a tuck-in acquisition for a porfolio company if a strong fit, but at a less than optimal valuation. It is critical to fix your deficiencies and excel in all aspects of your business to optimize your value and attract buyers.
3. Companies Don't Buy Startups or Small Companies.
There are 1,000 companies that Apple, IBM, Google, Salesforce or Facebook could buy and all could make strategic sense. But that's not how M&A deals happen. It's when a CEO sees a strategic gap, or a SVP sees a gap in what he/she can get done in the next 12-18 months - and fills that gap with an acquisition. In the end, corporate M&A departments have limited time and a specific M&A strategy. Smaller companies clearly enter the radar screens of buyers when they are $10+ million in sales and growing rapidly.
Your goal is to reach $10 million in sales in a profitable manner as soon as possible through organic growth or acquiring a company. The great majority of the time, M&A deals actually happen when a CEO, president or business owner has an experienced team of advisors behind him/her working extremely hard for 6+ months to get a transaction to closing.
4. You Have to Stay On.
M&A isn't a one-time cash-out, at least not anymore. Most deals have a 2-3 year retention, seller notes and potentially a 2-3 year Earn Out. Assume if you get acquired, you're committing to a minimum of 24 months with the acquiring company in a specific role.
5. Knowing the "Value Drivers" is Critical.
The acquirer will spend a huge amount of Due Diligence effort to identify the sources of value (Revenues, Gross Profit, Gross Profit Margin, Recurring Revenue, Technology and other Intellectual Properties, Management and Personnel, Brand, EBITDA, EBITDA Growth), as well as, deficiencies from the deal. It is essential for you to maximize these value drivers and present them to potential acquirers clearly and distinctly.
CEO Advisor, Inc. provides mergers and acquisitions advisory services and business consulting services to CEOs, presidents and business owners of small and mid-size companies. We address your specific needs with hands-on action, expertise and seasoned advice. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
